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Investment Notes

Despite an ongoing debate as to whether green buildings should be viewed as a distinct investment product, the amount of money invested in this sector is expected to mushroom, according to a report by RREEF, the real estate investment arm of Deutsche Bank.

Although the investor share of green building ownership, excluding net-leased buildings and similar arrangements, amounts to under 20 percent, the rising prevalence of green real estate funds suggests that a specialized market does indeed exist. In fact, there is close to $2 billion worth of investment plans that have already been announced.

Investors are finally recognizing the opportunity to profit from green building investments and are getting more comfortable with the product. A key driver is the Responsible Property Investing (RPI) movement, which advocates "triple bottom line" accounting that tracks environmental and social impacts, as well as the traditional financial returns (memorably termed "planet, people, profits" by one green developer).

RPI is becoming especially common with public pension funds, which account for a large share of real estate ownership in the country. Pension funds are hearing from their plan participants and directors, who are advocating more responsible investing, including greener buildings.

The Boards of both California Public Employees' Retirement System (CalPERS) and California State Teachers' Retirement System (CalSTRS), two of the largest and most widely respected pension funds, have promulgated guidelines advocating green policies (Green Wave) for their investments, including real estate, where prudent. In addition to actively seeking to build or acquire green buildings, they have also established goals to reduce energy usage in their portfolios of existing buildings by 20 percent over a five-year period.

An additional infusion of capital can be expected from the RPI movement. One study estimated there was $2.3 trillion in socially responsible investments in the U.S. as of 2005. If these investors in the U.S. allocated 10 percent of their funds toward real-estate, a typical share for pension funds, they would own two-thirds of the total capitalization of U.S.-based REITs, suggesting a tremendous pent-up demand for green and other socially-conscious investments. Thus, the RPI movement represents an opportunity for developers and property owners to tap into new and different sources of capital.

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